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In the year of 2001, Bethlehem Steel finds itself in a difficult position. After it filed for bankruptcy, an employee's daughter sought to evaluate her father's pension plan before the latter retires. However, due to the 9/11 terrorist attacks, economic activity weakened, and the U.S. equity market suffered heavy losses. Due to a dwindling general economic activity, Bethlehem Steel lost its competitiveness to global producers.
Peter Tufano; Zvi Bodie; Akiko M. Mitsui
Harvard Business Review (202088-PDF-ENG)
April 22, 2002
Case questions answered:
- Who are the stakeholders in the U.S. occupational pension system? What are the goals of each of the stakeholders? What is the difference between a DC and a DB plan? How far different are the two plan types with respect to the risk-and-return profile? What are the implications for an asset manager’s strategy of a DB vs. a DC plan?
- How could you evaluate the impact of the market conditions of 2001 on the Bethlehem Steel pension plan? The impact of the pension plan on the firm’s overall performance? Project the value of the pension's assets and liabilities as of December-31-2001, using the following assumptions: a. Interest rates on Dec-31, 2001 will be the same as they were on Oct-15, 2001. b. Equity market indexes will be at the same level on Dec-31, 2001 as they on Oct-16, 2001. c. Pension plan liabilities accrue at the same rate as they are paid out, such as the nominal future values of the pension plan’s liabilities at year-end 2001 were the same as they were at year-end 2000.
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Case answers for Pension Plan of Bethlehem Steel 2001
Introduction – Pension Plan of Bethlehem Steel 2001
In the year of 2001, Bethlehem Steel finds itself in a difficult position. Following the beginning of the global steel crisis in 1997, steel prices are near a 20-year low. Besides the problems of the strong USD and aging equipment, both domestic and international competition are challenging the once 2nd largest integrated steel producer of the U.S.
Furthermore, in the course of the 9/11 terrorist attacks, economic activity weakened, and the U.S. equity market suffered heavy losses. As the demand for steel is highly correlated with general economic activity, in retrospect, 9/11 may be seen as another nail in the coffin of Bethlehem Steel.
1.1 Who are the stakeholders in the U.S. occupational pension system? What are the goals of each of the stakeholders?
The main stakeholders of the pension system, are those for whom the pension funds are intended, the employees that receive their after-retirement income from these funds. However, there are several parties that have an interest or obligation towards these funds, either defined by law or inherent to their function in the system. All stakeholders have different defined goals which will all be discussed in turn.
The employees (and those they provide for) for which the pensions fund is intended are the main stakeholders, but they can be divided into different subgroups with different interests. There are the plan participants, the employees that are still in the contributing phase of their pension plan. Their goal is to accumulate wealth, either through own and/or through employer contributions.
Depending on their life stage, risk profile, and wealth from other sources, they may wish for investment strategies that are different in risk-return structure. We separate these current employees, from the retirees, who no longer accumulate wealth in the pension plan, but draw out their funds. Their goal is security and continuation of their accumulated pension. Employees can gather in Unions to collectively negotiate their interests in the pensions fund plans with their employers.
This makes employers the second group of stakeholders. Their goals and interests depend on the choice of pension fund structure, which will be discussed more into detail in the next section, but in general, they make a contractual agreement with their employees in which they define their contributions to the fund and future obligations in terms of payment of pension and possibly other benefits. On the one hand, they must manage these obligations as future liabilities, on the other, they are managing employer/union demands and obligations that come from legislation.
Through this legislation, the government is another stakeholder in the pension fund system. Not only can they perform as the employer in public pension funds. They have a responsibility towards their citizens in developing policy and the right legislative framework to ensure pension fund security. This resulted for example in providing taxation benefits to stimulate employers to engage in pension fund support and the forming of the ERISA legislation and PBGC pension insurance, both will be discussed later in this paper. The government also has instigated the invoking fiduciary obligations for those who invest on behalf of the participants.
The fiduciaries are represented in the last stakeholder group: the managers of the pension fund itself. Their goal is pension fund security and liability and risk management through asset allocation choices. They will have to incorporate the preferences of different stakeholders, like risk profile, as well as participant age and fund maturity when making their investment choices. Whether they invest on behalf of the employer or employee depends on the choice of the pension fund structure.
1.2 What is the difference between a DC and a DB plan? In how far differ the two plan types with respect to the risk-and-return profile?
Defined Contribution (DC) and Defined Benefit (DB) plans differ significantly in their funding and payment structure. The DB plans’ payment structure is that a defined monthly payment, similar to an annuity is paid to the plan participant during his/her retirement years, whereby the amount of this payment is set by a…
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